Charting the way forward
As India seeks a way out of the COVID-19 crisis, massive reforms to the health and economic policies are in order to kickstart and sustain India’s post-Corona recovery process
The Modi government is in the process of formulating a post-COVID-19 strategy. "We have to give importance to the economy as well as continue the fight against COVID-19," Prime Minister Narendra Modi said this week, addressing his fourth video-conference with Chief Ministers. The economic shock is likely to be more severe for India because the economy was already on the slide before the pandemic outbreak
According to top government sources, a section in the Central Government advocates that while the industry needs a stimulus to revive at the earliest, the Government should give priority to the taxpayer's money reaching the poor and needy. Interestingly, there is another section in the Government which is batting for the corporates.
The Prime Minister's focus on the economy comes after imposing one of the strictest lockdowns in the world for 40 days. It has hit everyone but more so the Indian poor. The International Labour Organisation has recently warned that more than 400 million Indians are at risk of tipping deeper into poverty.
So what should be the post-COVID-19 strategy? There are many suggestions but a section in the top echelons of the government point out that it is evident that huge resources are required to boost the economy as also the health sector. Asserting the need for the economic reforms to continue, these sources note that the months ahead are looking bumpy and there is every need to examine all the options. Some of the states have taken lead in looking ahead. West Bengal has set up a committee of experts including some Nobel Laureates. Former Prime Minister Manmohan Singh will assist the Punjab government to strategise its economy.
COVID-19 has clearly shown that the role of the government is vital in times of calamity and the states, in conjunction with the Centre, have risen to the occasion. They are working in tandem to deal with the pandemic. The states are already demanding more central funds to deal with the Coronavirus. The Government needs to raise huge additional funds from internal and external sectors. While doing so, it should take cognisance of the fact that the stimulus for the corporate sector for its share should not be at the cost of the poor and the focus should indeed shift from corporates to the most vulnerable sections of the society- urban or rural. The poor need a social security network including portable identity for individuals. This is possible if the reform paradigm were realigned. There is a need to ensure continued macroeconomic security, stable prices, a responsible monetary policy fragment and control of volatility in foreign exchange and debt sustainability. The pandemic has shown that while the market system was good, an improved regulatory structure is the need of the hour.
Restructuring Central Government expenditures including subsidies and Centre sponsored schemes as well as reducing wasteful expenditure needs to be addressed. The Prime Minister's motto has been 'minimum government and maximum governance.'
Reforming the financial sector, tax reforms, enhancing the domestic capacity through FDI while keeping in mind about the national interest, calibrating trade policy with a special focus on MSMEs as a driver for exports are some of the steps suggested for the post-COVID-19 strategy. Reforms in the agricultural sector, boosting the quality and quantity of agricultural and agro-processing sectors and reforms in land markets and establishing transparency and consensus on national economic statistics are vital.
The sources note that the proposed strategy should include a revised industrial policy, a new employment code and skilling of urban unemployed youth, retaining the rural population by providing jobs, identification of migrant labour through Aadhar cards and planned urbanisation.
Second, there is a need to shift to a predictable tax system that will hold for at least three years. Also, there is a need to revisit the share of the Centre and the states on the GST and residual excise revenue. The recommendations of the task force on direct tax code should be considered with a new direct tax code with very little compliance on the taxpayers. A hassle-free single window system to lure the multinationals and big business could be an option.
Third, the COVID-19 crisis provides an opportunity for the government to improve the quality and efficiency of the government expenditure and rationalisation of the Centre sponsored schemes. Along with that, wasteful expenditure by the states should also be monitored.
Fourth, with a possibility of the domestic savings to GDP ratio falling steeply this year, there is a need to move to capital market reform. Setting up a public debt management agency to manage government borrowings and capital account liberalisation can also be explored. In the financial sector, market reforms should be taken forward including fast-tracking the DEA and DFS reforms. Apart from revised gold bond schemes, the RBI should consider selling a portion of its gold reserves. Another option could be leasing gold internationally.
Fifth, FDI policy should be relooked with a view to providing automatic licensing and reduction of red tape. Lastly, in a post-COVID-19 period where most countries would opt for protectionism, India needs to go for trade liberalisation.
The post-COVID-19 strategy should be comprehensive as it is an opportunity to reset the economy and it should not be lost.
Views expressed are strictly personal